Appeals Judges Consider Independent Fund Director Rule
Challenge

April 15, 2005 (PLANSPONSOR.com) - As part of a
business lobbying group's legal challenge to a new rule
mandating more independence among mutual fund directors, a
government lawyer was repeatedly quizzed Friday about how the
rule was developed.

>It was
Giovanni Prezioso, general counsel for the US
Securities and Exchange Commission (SEC) on the hot seat
before the US Court of Appeals for the District of Columbia
Circuit about the director independent regulation approved
in June, according to a Reuters report. The rule is under
challenge from the US Chamber of Commerce, which sued to
block the rule in September on behalf of unnamed members,
arguing that the SEC had exceeded its authority and
violated legal procedures.

During oral arguments Friday in Washington, Chief
Judge Douglas Ginsburg asked Prezioso repeatedly whether
the SEC adequately had considered hard data, alternative
solutions and dissenting views before adopting the rule,
according to Reuters, Prezioso told Ginsburg that the SEC
“did speak to the economic information in front of it.”
Moreover, he replied, dissenting views were aired.

The rule being challenged requires that the
chairmen of mutual fund boards, as well as 75% of a
board’s directors to have no direct ties to the company
that manages the fund’s assets (See
SEC to Consider
Independent Director, Broker Rule Changes
). The regulation was adopted amid a wave of scandals
involving improper trading in the shares of many mutual
funds that cheated average fund investors out of
profits.

During Friday’s proceedings, Judge David Tatel
questioned the Chamber’s challenge of the SEC’s
authority, saying that the law empowering the commission
to write rules and regulations “is awfully broad
language.”

Chamber attorney Eugene Scalia told reporters after
the court adjourned that the SEC’s rule-making, from a
procedural standpoint, was still arbitrary and
capricious. He said the SEC did not sufficiently consider
some studies about mutual fund directors and making them
more independent.

To bolster his argument, Scalia pointed to what he
said was a remark by SEC Chairman William Donaldson that
“There are no empirical studies that are worth much …
It’s very difficult to find any studies that aren’t
biased in one way or another.”

Ginsburg asked Prezioso
whether the court should be concerned about the
remark. Prezioso said there was no cause for worry. He said
Donaldson was suggesting only that studies can be made to
say many things and that this may have been true in the
debate over the director independence rule.